Evaluation of the Factors Affecting Initial Public offering Underpricing by Newly-accepted Companies into Tehran Stock Exchange

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1 Internatonal Research Journal of Appled and Basc Scences 4 Avalable onlne at ISSN 5-8X / Vol, 8 (7): Scence Explorer Publcatons Evaluaton of the Factors Affectng Intal Publc offerng Underprcng by Newly-accepted Companes nto Tehran Stock Exchange Mashaallah Randdeh Department of Accountng, Kermanshah Branch, Islamc Azad Unversty, Kermanshah, Iran. Correspondng Author: Mashaallah Randdeh ABSTRACT: Prevous studes have reported three unusual features for ntal publc offerng: underprcng (short-term return), varablty of ntal offerngs from year to year, and negatve longterm performance. The am of the resent study was to examne the factors nfluencng the underprcng by newly-accepted companes nto Tehran stock exchange. New resources are provded for the development of the company on arrval at the stock exchange, that s why companes lke to be traded n stock exchange. In ths study, the relatonshp between the ndependent varables (age of company, type of ndustry, and type of ownershp) and underprcng were analyzed to evaluate the factors affectng the underprcng of new shares. The statstcal socety ncluded newlyaccepted companes nto Tehran stock exchange from 4 to 8. The fndngs ndcated no sgnfcant relatonshp between the varables of the study and underprcng durng the study perod. Ths ndcates that the actvty of Tehran stock exchange s smlar to that of other countres. Keywords: ntal offerng, underprcng, age of company, type of ndustry, type of ownershp INTRODUCTION In recent decades, ntal publc offerng has undergone a remarkable growth all over the world. In the late 99s n the Unted States, the sgnfcant yeld of ntal publc offerngs n the technology-based companes at the frst day, the formaton of nternet companes bubbles durng 999- and then the bubble s burstng durng - have caused ntense fluctuatons n ntal publc offerngs. Ths has attracted the attenton of researchers and expermental studes and consequently the theoretcal lterature has expanded n ths feld. Usng methods and technques of publc offerng of stocks s one of the most effcent methods of prvatzaton n most of the countres. Implementng the provsons of the polces of Artcle 44 of the consttuton n transferrng the state-owned companes to decrease the government ncumbency and to ncrease optmum supervson on resources, provdng the requrements for equty shares and mplementng the separaton of prmary and secondary markets as well as ther mechansms have caused experence be consdered mportant n other captal markets and the process of offerng shares be carred out wth more accuracy by estmatng the possblty of ther applcaton n the economcal condtons of Iran n terms of content and structure. Intal publc offerng s a condton n whch an enterprse that has not been actve n the stock exchange so far, sells ts shares to the publc. Three smlar models of ntal publc offerng that have been observed n the world nclude: Short-term underprcng of the share Cycles affectng the underprcng of ntal shares Poor long-term performance and less than the market performance (Rttre, 998) These three phenomena have been dscussed n the lterature. The focus of the present study was on the evaluaton of the factors nfluencng the underprcng n the ntal publc offerng. undreds of companes n the world enter the stock exchange daly through ntal publc offerng. They try to provde the requred nvestment to contnue and expand ther actvtes. So, t s mportant for these companes that the determned prce for ther shares ndcate the real value of ther propertes, development and growth opportuntes n the future. Ths s whle the studes conducted on ntal offerng of shares by many researchers around the world show that the determned prce for shares and securtes of companes n the ntal offerng s not favorable and make nvestors ncrease ther short-term nterest to purchase the shares of these companes and gan unusual revenue. Intal publc offerng means the frst sellng of a company's shares to the stockholders n the stock exchange. The companes that are offered n the stock exchange for the frst tme are not newly-establshed.

2 Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 The word ntal here means the company s shares are offered to the external stockholders n the stock exchange for the frst tme. The most mportant and nterestng event about ntal publc offerng s underprcng. Underprcng refers to a condton n whch the frm offerng the shares determnes the ntal prce of share surprsngly lower than the market prce. The amount of underprcng or short-term revenue s obtaned from the dfference between the closng prce n the frst day of exchange and prce of the shares dvded by the stock prce. Thus, as nvestors get the shares wth lower prces n the ntal publc offerng and sell them wth hgher prces n the frst day of ntal offerng, they can gan a large beneft. Ths process s known as underprcng n the ntal publc offerng market. Intal offerng n Iran durng the recent years has had a remarkable growth so that the number of ntal offerngs n 3 and 4 were 48 and 39, respectvely. Ths was vrtually equal to all ntal offerngs from 997 to 994 (89 ntal offerngs). Enactment of securtes act n 5 by the parlament and enactment of the nstructons of regstraton and publc offerng of securtes n 6 by the supreme councl of stock exchange ndcate coherence and systematzaton n the ntal publc offerng market. Ths study made an attempt to nvestgate the factors affectng underprcng n the ntal publc offerng by the newly accepted companes nto Tehran stock exchange. The research questons were formulated as follows: What s the relatonshp between the age of company and underprcng of the shares? What s the relatonshp between the type of ndustry n whch there s ntal publc offerng and underprcng? What s the relatonshp between the type of ownershp (publc and prvate) when beng accepted nto stock exchange and underprcng? The general and specfc objectves of ths study are presented as follows: Identfcaton of the factors affectng underprcng n the ntal publc offerng by the new companes accepted nto Tehran stock exchange n order to drect the stock exchange toward determnng the prmary prce and prospectve market accordng to the market condtons as well as other factors. The theores and hypotheses are analyzed wth regard to Tehran stock exchange to predct an approprate model when tradng new shares n order to help nvestors n Tehran stock exchange. Some of the studes conducted n and out of Iran are presented as follows: In the study carred out by Dr. Abdeh Tabrz & Demour (3) n Tehran stock exchange on the shares of the newly-arrved companes n the market from 99 to 995, the factors nfluencng long-term return were the amount of annual trade of shares, sze of the company, and short-term return ganed from tradng the shares of the newly-arrved companes n the stock exchange. The results of ths study ndcated that hgher short-term return and lower long-term return of the newly-accepted companes nto stock exchange were comparable to the market (ndex) return. Thus, the prcng performance of the newly-accepted companes nto Iran s stock exchange could be consdered smlar to other captal markets n other countres. In hs M.A. thess ttled the measurement of short-term and long-term returns of ntal publc prcng conducted n Ahwaz Unversty of Shahd Chamran, Mehd Alkhan Bowan (8) nvestgated companes n Tehran stock exchange from 998 to 6. The fndngs showed that n Iran lke other companes, the unusual short-term return of ntal publc offerngs was postve and equaled 3.78%, but there was no evdence on the negatve performance regardng long-term return. Also, only the market return affected the 3-year longterm return of ntal publc offerngs among factors such as market return, age of the company, and short-term return. Rtter & Welch (3) analyzed the ntal publc offerngs n the Unted States and nvestgated why companes present ntal publc offerngs. They suggested varous reasons the most mportant of whch are presented below: Access to more funds: whle the company has ntal publc offerng and ts shares are traded n stock exchange, owng to the requrements of specal dsclosng of stock exchange, fnancal nsttutons and banks gve larger loans to companes. Jonng the stock exchange wll expose the company, whch has probably been unknown for some tme, to mllons of nvestors. Ths causes an ncrease n the company's shares and more precse evaluaton of the company. Carryng the name of "publc lmted company" can brng ndrect benefts for the enterprse as well, one of whch can be hrng competent managers. Gounopoulos (3) studed the performance of ntal publc offerngs n Athens' stock exchange. By referrng to the studes conducted n the captal markets n the Unted States, England, Germany, Canada, Chna, Swtzerland and Australa, he consdered ntal underprcng of the new shares as a general and common phenomenon n the captal market. Many studes have been conducted on the performance of the new shares n the Athens' Stock exchange. That's why the researcher made an attempt to analyze the short-term performance of the new companes n Athens's stock exchange from 99 to. e presented many hypotheses (6 hypotheses) for hs study, some of whch are presented below: There s a negatve relatonshp between the sze of the company and underprcng. 874

3 Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 There s a negatve relatonshp between the credblty of the new sharebrokers and underprcng. There s a negatve relatonshp between the new shares and underprcng. There s a negatve relatonshp between the market condtons and underprcng. There s a negatve relatonshp between the age of the company and underprcng. There s a negatve relatonshp between the rsk of the ndustry the new shares belong to and underprcng. To carry out hs study, Gounopoulos consdered the underprcng of the new shares n the percentage of the changes between the prce of offerng shares and the prce of the new shares at the end of the frst day and used regresson test to determne the relatonshp between the varables. TE RESULTS OF IS STUDY INCLUDE TE FOLLOWING The analyss of the prmary performance of the new companes n the Athens' captal market ndcated that the ntal offerng of the new companes n ths market was around 6.5% underprcng whch was relatvely hgher than the fndngs of prevous studes carred out n Athens (new underprcng, 57%, the result of the study by Kazantzs and Thonas, 996). The results of the multvarate analyss showed that the market condton (boom or bust) s the most nfluental factor n underprcng. There was no sgnfcant relatonshp regardng other varables. As t was mentoned, the factors nfluencng underprcng n the ntal publc offerng by the newly-accepted companes nto Tehran stock exchange were nvestgated n ths study, so the hypotheses were formulated as follows: ypothess. There s sgnfcant relatonshp between the age of the company and underprcng. ypothess. There s sgnfcant relatonshp between the type of the ndustry holdng the new shares and underprcng. ypothess 3. There s sgnfcant relatonshp between the type of ownershp on arrval at stock exchange and new underprcng. METODOLOGY Ths study was descrptve correlatonal and the statstcal tests appled were correlaton and Chsquare tests. Also, the data were collected n two stages; n the frst stage, the theoretcal bascs of the study were collected usng lbrary method and n the second stage, the data from 3 to 8 were collected through Tehran stock exchange ste. Further, Rahavard Novn software and the ste of research center for Islamc studes were used to collect data. SPSS software was used to analyze data and perform statstcal tests and part of the analyses was carred out by Excel. The statstcal methods used n ths study are presented below: The correlaton analyss tool was used to determne the type and degree of the relatonshp between a quanttatve varable and another quanttatve varable. Correlaton coeffcent s one of the crtera used to determne the correlaton between two varables. Correlaton coeffcent ndcates the degree and type of relatonshp (drect or reverse). Ths coeffcent s from to - and t s zero n case there s no relatonshp between two varables. Pearson and Spearman Correlaton Coeffcents: Pearson Correlaton Coeffcent (r) s calculated va the followng formula: () r ( n ( x x)( y n n ( x x) ( ( In ths formula ) y) ( y y) وxy and ( xn, yn ) ) are n pared observatons. Ths correlaton coeffcent s a parametrc method used for the data wth normal dstrbuton or large number of data. If the number of the data s low and the normalty assumpton s not logcal, another correlaton coeffcent s used whch s not based on the man sums and s calculated based on the rank of the data. The correlaton coeffcent, that s calculated accordng to the ranks of the data, was proposed by spearman ( r s ) and s calculated through formula : () r s 6( n( n d ) ) 875

4 Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 In ths formula, n represents the number of data and ( d ) ndcates the sum of squared dfferences between the ranks of two varables. The value r s the smlar sample of p, the correlaton coeffcent of the statstcal socety. The correlaton coeffcent of the socety s defned n formula 3: (3) ) Cov( x, y) p Corr( x, y) Thus, the sample correlaton coeffcent r can be consdered as the estmator of the correlaton coeffcent of the socety, p. By squarng the correlaton coeffcent (r), the coeffcent of determnaton ( r ) s obtaned. The coeffcent of determnaton ndcates what percentage of changes n the dependant varable s explaned by the ndependent varable. Ths coeffcent s wdely used n regresson. The drecton of relatonshp n correlaton s two-sded and the researcher does not know whch varable affects another varable. If the researcher knows the drecton of the relatonshp, the regresson analyss wll be used. If one varable s quanttatve and another one s qualtatve, the quanttatve varable should frst be changed nto qualtatve varable and then the relatonshp between them be determned by test. The am of the ndependence test s analyzng the presence of ndependence between two non-quanttatve varables. Ch-square ( ) test s appled to examne the ndependence hypothess of two varables one of whch s qualtatve and another one s ether qualtatve or quanttatve wth lmted levels (the quanttatve varable changed nto qualtatve varable). In general, an r c table has r rows representng dfferent states of for a varable and 3 columns ndcatng dfferent states of y,..., y, y n for another varable. The statstcal hypotheses are formulated as follows: : Two random varables are ndependent. : Two random varables are not ndependent. The ndependence test s calculated va formula 4: r c ( ojej ) (4) e j j y x r,..., x x In the above formula, oj s the observed frequency (expermental frequency) and ej s the expected frequency (theoretcal frequency) for the pont where th row meets j th column. For every box n the table, the expected frequency e j s determned va formula 5. sumsumj (5) e j sumtotal Sum : total of row Sum j: total of row j Sum total: total In a table wth row r and column c, the degree of freedom s computed accordng to formula 6: (6) df= (r-) (c-) The ndependence test wth tables nclude crtcal rght-handed areas because small values of confrm the ndependence clam of the two varables. On the other hand, f observed and expected frequences are close, s small. Large amounts of are rght-handed n the ch-square table and reflect a sgnfcant dfference between observed and expected frequences. The null hypothess s rejected when the numercal value of test statstcs s larger than. If the analyss of the, a, ( r)( c), multple test ndcates correlaton between two varables, the power of ths correlaton can be computed through the formula 7, n whch s calculated accordng to the formula and n s the total number of observatons. (7) c n 876

5 u.prcng Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 The statstcal methods used are dfferent accordng to the measurement scale. To analyze the relatonshp between all ndependent varables and dependant varable, underprcng of new shares, the followng statstcal methods are used: Independent varable dependant varable statstcal methods Age of company underprcng the new shares correlaton Type of ndustry underprcng the new shares ndependence test Type of ownershp underprcng the new shares ndependence test It should be ponted out that, n order to analyze the ndependent varable, type of ownershp, t s dvded nto two publc and prvate classes for whch ndependence test s used. Also, to perform statstcal methods, the normalty of the data should be analyzed by Kolmogrov-Smrnov test. RESULTS Wth regard to the sgnfcance of the normalty assumpton, the results of Kolmogrov-Smrnov test ndcated the normalty of the prmary data. In fact, the followng hypotheses were tested: : Data are normal. : Data are not normal. Asymp. sgnfcant level (two-sded test) was 89% whch was larger than α=.5 (95% confdence level) and the null hypothess was confrmed. Thus, the prmary data were normally dstrbuted based on Table. Table. The results of normalty of data obtaned va Kolmogrov-Smrnov test Descrpton Value-Result Number of companes tested n the research Normal dstrbuton parameter (Mean) 86.7 Normal dstrbuton parameter (Standard devaton) 3.59 Maxmum absolute devaton.8 Maxmum postve devaton.8 Maxmum negatve devaton -.9 Z value.9 Two-sded test.89 The results of the research hypotheses are presented separately as follows: Testng the frst hypothess The frst hypothess suggested that there s sgnfcant relatonshp between the age of the company and underprcng of the new shares. Snce the am of analyzng the relatonshp between the varables s quanttatve, Pearson and Spearman correlaton coeffcents were used. The smplest and most effcent method of analyss s scatter plot because ths graph shows the general dea about the relatonshp between two varables. As ndcated n Graph, the scatter plot of the age of company (ndependent varable) aganst underprcng of new shares (dependant varable) dd not reveal any specfc model age 4 6 Fgure. Scatter plot of the frst hypothess Further, Pearson and Spearman correlaton coeffcent tests were used to test the research hypotheses. 877

6 Count Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 : There s no sgnfcant relatonshp between the age of the company and underprcng of new shares. : There s a sgnfcant relatonshp between the age of the company and underprcng of new shares. On the other hand: ρ =: ρ : Table demonstrates the results of Pearson correlaton coeffcent, two-sded test and number of the companes. Accordng to the fndngs presented n ths table, as the result of the two-sded test was.773 and hgher than.5, the null hypothess was confrmed. Therefore, there s no sgnfcant relatonshp between the age of the company and underprcng of new shares. Table. Results of Pearson correlaton coeffcent for the frst hypothess Varables Explanaton Underprcng Age of the Varables company Underprcng Pearson correlaton coeffcent -.3 Two-sded test Number of companes.773 Age of the company Pearson correlaton coeffcent Number of companes Testng the second hypothess The second hypothess stated there s a sgnfcant relatonshp between the type of company and underprcng of new shares. As argued prevously, when testng the relatonshp between a quanttatve and a qualtatve varable, ndependence test can be used. The ndependence test was used to determne the relatonshp between the ndependent varable, type of ndustry (qualtatve varable) and dependant varable, underprcng (quanttatve wth lmted levels). So, the null hypothess and ts counterpart are defned as follows: : There s no sgnfcant relatonshp between the type of company and underprcng of new shares. : There s a sgnfcant relatonshp between the type of company and underprcng of new shares. Table 3 llustrates the value, degree of freedom, two-sded test, and Pearson Ch-square test. As t s ndcated, the result of two-sded Pearson Ch-square test was.3 (p.5), whch shows the null hypothess was not rejected. Thus, there was no sgnfcant relatonshp between the type of company and underprcng of new shares. Table 3. Results of Pearson Ch-square test for the second hypothess Descrpton Value df Two-sded test Number of companes Invald data Vald data Pearson Ch-square In Graph, some descrptve statstcs about underprcng and the type of company are llustrated separately, whch ndcates that the type of company has no effect on underprcng ndustry.t Fgure. Scatter plot of the second hypothess 878

7 Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 Testng the thrd hypothess The thrd hypothess stated that there s a sgnfcant relatonshp between the type of ownershp on arrval at stock exchange and underprcng of new shares. As prevous test, ndependence test was used to determne the relatonshp between ndependent varable, type of ownershp (qualtatve varable), and dependant varable, underprcng (quanttatve varable wth lmted levels). The null hypothess and ts counterpart were defned as follows: : There s no sgnfcant relatonshp between the type of ownershp on arrval at stock exchange and underprcng of new shares. : There s a sgnfcant relatonshp between the type of ownershp on arrval at stock exchange and underprcng of new shares. Table 5 demonstrates the value, degree of freedom, two-sded test and Pearson Ch-square statstcs. As t s ndcated, the result of two-sded Pearson Ch-square test was.89 (p.5), whch shows the null hypothess was not rejected. Thus, there was no sgnfcant relatonshp between the type of ownershp on arrval at stock exchange and underprcng of new shares. Table 5. Results of Pearson Ch-square for the thrd hypothess Descrpton Value df Two-sded test Number of companes Invald data Vald data Pearson Ch-square DISCUSSION AND CONCLUSION The fndng obtaned from the frst hypothess ndcated no sgnfcant relatonshp between the age of the company and underprcng of new shares. In prevous studes the age of company had been consdered as the recognton benchmark of the frm for nvestors. Perhaps n the stock exchange, nvestors do not care for the recognton of the frm and ths can not affect ther long-term return. On the other hand, t s possble that the age of company s not a good crteron for beng known and other crtera may nterfere wth underprcng. The results of the second and thrd hypotheses revealed no sgnfcant relatonshp between the type of the company, n whch the newly-accepted companes were actve, the type of ownershp (governmental or non-governmental) on arrval at stock exchange and underprcng as dependant varable. As explaned n the lterature revew, Gounopoulos (3) nvestgated the performance of the ntal offerngs n Athens stock exchange. By referrng to the studes conducted n the captal markets of Unted States, England, Germany, Canada, chna, Swtzerland and Australa, he consdered ntal underprcng of new shares a general and common phenomenon. Many studes have been done over the performance of the new shares n Athens stock exchange. That s why the researcher tred to analyze the short-term performance of the new companes n Athens stock exchange by selectng a sample consstng of 5 companes n a tme perod of 99-. e proposed 6 hypotheses for hs study, three of whch were about the relatonshp between the age of company, type of ndustry, type of ownershp of newly-accepted companes nto stock exchange and underprcng of new shares. The results of multvarate test ndcated that the market condtons (boom or bust) were the most nfluental factors n underprcng of new shares. Regardng other varables such as age of the company, type of ndustry and type of ownershp, the results of regresson dd not show sgnfcant relatonshp, whch ndcate that the results of the present study are smlar to those of other countres. As ndcated n the prevous secton, the ndependent varables (age of the company, type of ndustry and type of ownershp) were used along wth the dependant varable, underprcng of new shares. Future studes are recommended to nvestgate the followng domans: The relatonshp between the sze of the company and fnancal leverage, and underprcng of new shares. Whether underprcng, as a knd of advertsng, s more cost-effectve than other forms of advertsement. Whether the tme delay from lstng the company n the exchange board to ntal publc offerng affects underprcng of new shares. Whether ntal offerng methods (Amercan, aucton or fxed prce) affects underprcng of new shares. Comparson of underprcng between dfferent types of ndustry, calculaton of underprcng for every ndustry and usng the results. 879

8 Intl. Res. J. Appl. Basc. Sc. Vol., 8 (7), , 4 Measurement of underprcng n every type of ownershp (publc, prvate, governmental, non-governmental and banks) on arrval at stock exchange separately and comparng the results to better analyze underprcng. REFERENCES Abdeh Tabrz, Damour D.3. Identfcaton of the factors affectng the long-term return of the newly-accepted shares nto Tehran stock exchange, Economy journals, fnancal research, 5. Alkhan Bowan M.8. Measurement of the short-term and long-term returns of ntal offerngs. MA. thess of accountng, Ahwaz unversty of Shahd Chamran, faculty of post-graduate studes. Dastgr M, Alkhan Bowan M. Intal publc offerng: underprcng and ts related assumptons, Stock monthly, 58, p: 3. Gounopoulo D, Both B. 3. " The ntal performance of IPO: evdence from Athens Stock Exchange ", n European Fnancal management Assocaton conference elsnk, Fnland. Javaherzadeh N.7. A gude to research proposal preparaton. Tehran: Farhang Zaban. Momen M, faal Ghayoum A.7. Statstcal analyss of data by SPSS software. Tehran, Ketab e no. Rahm Boroujerd A. 6. Prvatzaton, Tehran, Tehran unversty publcatons. Mehranfar M.8. Bascs of Tehran stock exchange. Tehran Chalesh publcatons. Rtter J, Welch I.3. A Revew of IPO Actvty, Prcng and Allocatons, Journal of Fnance, 57(4): Rtter J.998. The cost of gong publc. Journal of Fnancal Economcs 9,